Should PAs be treated as FSPs under IBC

Should PAs be treated as FSPs under IBC

A clear and tailored insolvency framework—through express recognition of PAs under the FSP regime and closer coordination between the IBC and RBI regulations—is therefore necessary to ensure orderly resolution, continuity of critical services, and sustained confidence in India’s digital payments system

India’s digital payments ecosystem relies heavily on payment aggregators (“PAs”), who facilitate large-scale settlement of transactions while handling significant volumes of customer funds. Recognising their significance, the Reserve Bank of India (“RBI”) established a comprehensive regulatory framework governing the authorisation, supervision, and fund-handling obligations of PAs under the Master Directions on Regulation of Payment Aggregators and Payment Gateways, 2025.¹

While this framework strengthens operational and consumer safeguards, it remains silent on the resolution of PA insolvency. Uncertainty mainly surrounds the treatment of merchant funds and the continuity of essential payment services. Given their central role in digital payments, this article examines whether PAs may be treated as financial service providers under the IBC and argues that the absence of explicit insolvency treatment creates regulatory uncertainty with systemic implications.

2.1. Operation of PAs and PGs

PAs are undertakings who enable merchants to accept multiple payment mechanisms from consumers to complete their payment obligations, eliminating the requirement for businesses to establish their own payment system. The RBI ‘Guidelines on Regulation of Payment Aggregators and Payment Gateways’ dated 17 March 2020 (“PA & PG Guidelines”) laid down rules on the distinction between PAs and PGs, PA operations, and minimum net-worth requirements. The PA & PG Guidelines clarify that while PGs provide a platform to facilitate online payment processing without directly handling funds, PAs collect and directly handle the funds.

PAs may be engaged by banks and/or merchants and render services over the banking network and provide a technological interface, allowing data access through a standardized, centralized platform. PAs collect payments from customers, hold them for a short period, and then transfer them to the merchants. Merchants receive payments from customers after calculation and disbursement of net settlement. Non-Bank PAs must maintain the amount collected by them in an escrow account with a single scheduled commercial bank. Final settlements are executed on a T+0 or T+1 basis as per the prescribed mechanism.

3.2. Insolvency and Regulatory Issues

The insolvency of companies incorporated in India under the Companies Act, 2013, is ordinarily governed by the IBC. However, if the services provided by a PA qualify as “financial services” under the IBC, they could be considered a financial service provider (“FSP”).² Resolution proceedings would then be governed by the Insolvency and Bankruptcy (Insolvency and Liquidation Proceedings of Financial Service Providers and Application to Adjudicating Authority) Rules, 2019 (“FSP Rules”).

This classification is significant because PAs would receive additional protections such as continued regulatory authorisation during the moratorium, prioritising payment system stability along with creditor enforcement. The following sections examine whether a PA may be considered a Financial Service Provider and the impact of such a classification on the manner of insolvency resolution.

a. Do PAs Qualify as FSPs?

i. Regulatory Status of PAs

A payment system enables payment to be effected between a payer and a beneficiary, including clearing, payment or settlement service or all of them, but not a stock exchange.³ PAs facilitate transactions by receiving, pooling, and settling funds through escrow accounts, and are considered as designated payment systems upon receiving RBI authorisation. Through the PA & PG Guidelines, they were designated as Payment System Operators (PSOs),⁴ specifically third-party application providers (TPAPs)⁵ supporting financial market infrastructures (FMIs). TPAPs only provide an interface while banks process the underlying transactions. The Report of the Committee to Draft Code on Resolution of Financial Firms⁶ suggests classifying PAs as non-systemically important PSOs which would be governed by the IBC with modifications.

ii. Payment Aggregation as a Financial Service

The definition of financial services⁷ under the IBC includes the acceptance of deposits and providing stored value/payment instructions/payment services. Further, the definition of financial services is inclusive and can be interpreted to include a larger range of activities. Treating the activities of PAs as financial services supports their designation as FSPs and governance by a tailored set of regulations. The absence of explicit recognition under the IBC creates uncertainty around the insolvency process of PAs.

iii. Modified Insolvency Framework for PAs

An FSP is an entity providing “financial services” with authorisation from a financial sector regulator. The definition of “corporate persons” under the IBC excludes FSPs from its scope, as they handle significant volumes of consumer funds. However, certain FSPs may nevertheless be included through notification, such as non-systemically important PSOs. The following modifications as per FSP Rules would then apply -

1. Insolvency proceedings can be initiated against PAs only by an application by the RBI.

2. The license/authorisation granted to the PA cannot be suspended/revoked during the moratorium period, ensuring continuity of services.

b. Consequences of PA Insolvency

i. Treatment of Merchants and Merchant Funds

Customer funds held by PAs in escrow accounts are used solely for settlement of transactions in favour of the merchant and to discharge liabilities arising from usage of the PA service by customers. Merchants can thus be categorised as creditors of the PA and file their claims in the resolution process.

Further, persons entitled to payments have a first and paramount charge on the balance held in such escrow accounts, and resolution professionals/liquidators must use the funds only after all such persons are paid in full or adequate provisions are made for the same. Therefore, merchant settlement would take precedence over the conventional waterfall mechanism under the IBC.

ii. Settlement Disruption and Service Continuity

The PSSA provides that settlements that become final and irrevocable before an order of insolvency is passed against a PA shall not be affected by such insolvency . As for pending obligations during the moratorium, in the absence of a clear mechanism, settlement failure may lead to financial distress to both merchants and customers.

This risk may lead to reduced trust in PAs and may cause merchants to attempt to switch providers, which can trigger its own insolvency as well as other system participants. Switching is resource intensive for the merchant and the new PA, possibly leading to systemic fallout. Such disruptions not only undermine creditor recoveries but the continuity of essential payment services, which insolvency law seeks to preserve.

Conclusion

The current insolvency framework leaves a gap in the treatment of payment aggregators, whose functions involve handling and settling large volumes of customer funds, but whose failure is not addressed with sufficient clarity under the IBC. This uncertainty creates risks for merchants, customers, and the stability of the digital payments ecosystem. A clear and tailored insolvency framework—through express recognition of PAs under the FSP regime and closer coordination between the IBC and RBI regulations—is therefore necessary to ensure orderly resolution, continuity of critical services, and sustained confidence in India’s digital payments system.

Disclaimer – The views expressed in this article are the personal views of the authors and are purely informative in nature.